Big Pharma Stocks: Real Rally Or One Day Wonder?

One day does not a full-fledged sector rotation make, but yesterday the big pharma stocks put on a show and in the early going today the curtain hasn't fallen.

Pfizer even broke above 18 bucks!

The Amex Pharmaceutical Index jumped 3.3% which, according to our resident expert statistician Robert Hum, is the biggest one-day percentage gain in more than four years. May 5th, 2004, he says, was the last time the sector went up by at least that much in a single trading day. I'm not going to focus on them in this post, but biotechsalso rallied on Tuesday. Genentechkicks off that sector's earnings season after the closing bell next Monday.

Some of the big pharma stocks have been trading around multi-year lows (i.e. a decade or more), so perhaps they were overdue for a bounce. But does it signal a bottom? Who knows? Certainly, I'm in no position to make that call, but take the poll and see what others think.

The industry's issues are well-documented:Tens of billions of dollars worth of brand-name drugs lose their patents over the next five years, generally speaking there isn't enough in their drug development pipelines to replace those blockbuster products, a more cautious regulatory environment and the specter of a Democrat-controlled Washington has been scaring off investors.

In a research note to clients yesterday Goldman Sachs analyst Randall Stanicky wrote that the so-called "patent cliff" will peak in 2012 when an estimated $25 billion worth of prescription drugs will go generic. $25 billion worth in one year. And regarding the fear about the Dems putting the clamps on the industry, it's worth pointing out the latest campaign contribution figures from www.opensecrets.org.

As of June 30th, the Center for Responsive Politics, says the "Pharmaceuticals/Health Products" industry has given Sen. Barack Obama more than three-quarters of a million dollars so far. He's the top recipient of drug sector money among the entire original field of presidential candidates. Senator John McCain is a distant fourth with $292,000 from pharma/health products.

And while we're on the topic of drug development challenges, the Food and Drug Administration this morning is announcing a change to some of its regulatory terminology that has sometimes caused a good deal of confusion. The agency is abandoning the use of "approvable" and "not approvable" letters. As I've blogged many times before, approvable has essentially become a euphemism for delay.

But people--including some in this newsroom--hear the word "approvable" and assume it's a win because it's so close to "approval." So, starting on August 11th, the FDA will issue "Complete Response" instead of "approvable" or "not approvable" letters. The CRL, which is already used for biotech drugs, will spell out for companies what they need to do to possibly win approval down the road or why they're not ever gonna win approval. But that doesn't necessarily mean the agency or the companies will publicly divulge that information. Some companies release the details, many do not, presumably for competitive reasons. But that leaves analysts and investors to guestimate what the problem(s) might be and how long it might take to clear it (them) up.

Dr. Janet Woodcock, the head of the FDA's Center for Drug Evaluation and Research, is quoted in the press release as saying the change will offer "a more consistent and neutral way of conveying information to a company when we cannot approve a drug application in its present form." In a recent meeting with FDA Commissioner Dr. Andrew von Eschenbach he told me he's on a mission "to improve speed and efficiency" at the agency. They're upgrading their labs, IT infrastructure and hiring a bunch of people. But he added that the quality of a company's drug approval application is the key factor in determining the timeline.

In the past couple of weeks the agency put the brakes on two items it had fast-tracked--a new bloodthinner from Eli Lillyand Merck's cervical cancer vaccine, Gardasil, for older women.